Jim Goddard from Oriel Contractors says: “Many individuals choose to be a contractor, rather than being a conventional permanent employee, because:

• They enjoy working for different organisations

• Like meeting a wide range of people

• Continuously develop their skills set

In turn this makes them a more sellable commodity and able to command a higher daily or hourly rate.”

“You’ll benefit enormously if you can develop two key relationships, from the outset” advises Jim Goddard.

Relationship No1

Much maligned and often criticised the poor old recruitment agent actually does plenty behind the scenes, and works very hard for all the contractors on their books. You don’t have to become bosom buddies but you do need that mutual respect. You need to be confident your recruitment agent will secure you suitable work at maximum rate, with little or no break between contracts.

Your recruitment agent meanwhile has to have confidence in your ability to be able to fulfill the contract, whilst at the same time interacting with the end-client in a professional and businesslike manner.

Relationship No 2

The second important partnership you’ll profit from is having a good team of people sorting out your back-office. Someone to do all your paperwork, fill out forms, talk to the authorities (HMRC) and ensure you’re paid as quickly as the process will allow. Also, in order to work legitimately you must be employed by a limited company that is registered for PAYE with HM Revenue & Customs.

“You could setup your own limited company and run things yourself. It sounds grand and you can call yourself a director, but do you really want to fill in forms and complete statutory returns after a full day’s work? Most people would prefer not to – given a choice.”

Save Time, Save Worry with an Umbrella Company

The days of ‘cash in hand’ have long gone. In order to work legitimately you must be employed by a limited company that is registered for PAYE with HM Revenue and Customs.

This gives you two choices:

• Register for free with an umbrella company.

• Set up and run your Own Limited Company and accept the additional work that comes with doing it yourself.

Self employment isn’t an option for contractors.

Advantages of working through an Umbrella Company:

1. Employment Protection. An umbrella company provides employment to you in much the same way as any other business that employs staff. You have a Contract of Employment under the Employment Rights Act 1996 which grants you full employment rights & statutory protection for the time you are registered with your contractor umbrella company.

2. Overarching Contract. Your contract of employment is drawn up on the basis that you become a permanent employee of your contractor umbrella company in the expectation that you will be working for the contractor umbrella company on a number of contracts/assignments.

3. Your permanent workplace will normally be your home which you will use as a base to complete your paperwork, search for new contracts, and travel to the various temporary workplaces that you need to attend to fulfill your contract.

4. You are able to claim business travel (which covers: mileage, subsistence & accommodation) from home to your temporary workplace(s).

5. Insurance. As an employee of an umbrella company you are normally covered by the contractor umbrella company’s group insurance cover (employers’ liability, ,and public liability & sometimes professional indemnity liability).

6. Paperwork. The real advantage of working for an umbrella company is they provide a simple means of employment for those who don’t want the hassle and burdens of running their own limited company. Your umbrella company looks after all the day-to-day administration:

• Contracts

• Assignments

• Invoicing

• Credit control

• Expenses

• Payroll

• All statutory matters from company law to PAYE; from employment law to IR35; and, from national minimum wage compliance to the working time directive.

7. Peace of Mind. Umbrella companies offer a proven, compliant and comprehensive service which will be supported by a team of taxation, HR, legal, accounting, administrative and customer support staff.

Here’s an Umbrella Company Process Overview:

• You become an employee of your umbrella company

• The umbrella company provides you with full employment rights through an overarching contract of employment

• You’ll be expected to remain an employee of the umbrella company and work on successive assignments with them

• The umbrella company take full responsibility for, PAYE, National Insurance payments, VAT, and all corporate and statutory reporting

• The contracts (or assignments) for your services are entered into by the umbrella company and they take responsibility for all contractual matters

• Between contracts your umbrella company should support you in getting new contracts.

Jim Goddard concludes: “Getting Started with an Umbrella Company is straightforward. Once you have discussed your contract with the recruitment agent:

1. The umbrella company contacts your recruitment agency/client and enters into a contract on your behalf for your services

2. The umbrella company will send you a contract, and details of your assignment

3. You sign and return any forms, and give the umbrella company your P45

4. The umbrella company will give you a call to make sure you understand everything that’s going on.

Employee
Under the employee route, all of the individual’s income will be classed as earned income and the contractor will deduct all relevant taxes under standard PAYE rules due by the

individual before any monies are paid to him.

Sole Trader/Limited Company
Under the sole trader or limited company option the individual must first be able to show that they are genuinely self-employed, and not an employee of the contractor. There are

then specific rules that govern the amount of tax to be deducted by the contractor from the individual/company before monies are paid to them.

To determine how much is to be deducted from the individual, the contractor must contact HM Revenue & Customs (HMRC) who will then verify the individual’s status. To do this

the contractor will need the subcontractors Unique Tax Reference (UTR), National Insurance Number and full name then HMRC will confirm the subcontractor’s payment status as

being either:
• Gross – no tax deducted
• Net – the contractor must deduct 20% from the gross amount
• Higher rate – 30% must be deducted from the gross amount

The verification number issued by the Revenue must be noted by the contractor and included in all reports to HMRC as proof that the subcontractor has been verified and

deductions made based on their tax status. There are then additional requirements for the contractor to complete specific declarations to HMRC (monthly returns) and issue the

subcontractor with a monthly pay statement (in a specific format as detailed in the legislation guidance). If the contractor does not adhere to these rules there are heavy penalties

attached.

Subcontractors, What Next?

Jim Goddard, Divisional Manager of Oriel Contractors, goes through the two options a subcontractor can take:

• “Subcontractors wishing to be paid within the Construction Industry scheme will have to check that the work they are undertaking is that of self employment. The HMRC

have an employment status test that can be used for this purpose or Oriel has developed its own guidance on employment status. If the subcontractors work will be self

employment then he/she will be eligible for the CIS scheme. Firstly they must register with HMRC as self employed and then once they have their UTR number they can phone the

CIS Helpline on 0845 366 7899 to be registered for the scheme. The process of registering is quite straight forward but companies like Oriel Contractors can help guide new

subcontractors through the process and make sure that by registering correctly they are not charged higher rate deductions.”

When a subcontractor obtains a contract to do work, which is covered by CIS, then the subcontractor needs to register with HMRC as soon as possible if they are not currently

registered. This can be done by calling the HMRC or registering online. The information that will be required will vary depending on whether the contractor is a sole trader,

partnership or company.

• Jim Goddard continues: “The problem for a lot of subcontractors is that dealing with HMRC can be daunting if you are not familiar with the process. Oriel Contractors can

give subcontractors friendly advice on the quickest and simplest way to register so they can just get on with their job with no worries at the back of their mind.

• “Once the initial registration is completed we’re happy to do all the regular paperwork for the subcontractor and we make sure they have all the backup to their payments

to ensure they are complying with the CIS rules. All the subcontractor needs is a personal bank account that we can put their net pay into. Our friendly and expert team are on

hand to help any subcontractor and we’re just a phone call away.”

If, like most new subcontractors, you really don’t want to get confused with dealing with the HMRC then you’re likely to be better off talking to a company that can advise you of

the simplest way to register. It’s probably worth giving them a call if nothing else.

Unlike permanent employees, contractors face various tax implications which can affect exactly how much they take home in their pay packet each month. Most contractors look for a way of reducing their tax bill, where possible, and rely on the professional advice of their umbrella company. Jim Goddard, Divisional Manager of Contractor Supermarket featured umbrella company Oriel Group comments:

“It is possible for contractors using an umbrella company to off-set some of their tax liabilities by claiming for legitimate business expenses. The better umbrella companies, like Oriel, have a team of expert tax advisors on hand to ensure their contractors know exactly what expenses can be claimed and so take home the maximum net pay legally allowed by HMRC. Oriel continually review it’s processes to ensure compliance with the latest tax laws meaning that our contractors can sleep easy knowing they are protected from any future HMRC investigation.”

The other key benefit provided by an umbrella company is that they offer self-employed workers with a ready-made limited company through which they can operate multiple contracts. The umbrella company does all the administration & paperwork and only charges when the contractor is working, so in between contracts there are no worrisome bills.

The benefit from using an umbrella company is that the contractor saves time and worry on all the complex administration usually associated with running a limited company, including:

* Processing timesheets
* Understanding business expenses
* Raising invoices in the correct manner
* Credit control
* Calculating tax and National Insurance
* Collecting payments from the recruitment agency or end client
* Handling legal contracts
* General paperwork and filing
* Staying up to date with ever changing legislation

All legitimate umbrella companies provide additional benefits such as holiday and sick pay. Umbrella companies can also give the contractor access to other benefits not readily available to them, such as pension schemes, private healthcare, life and critical illness insurance and childcare vouchers.

Umbrella companies provide Employer’s Liability and Public Liability insurance cover within the fixed price, and most also include Professional Indemnity Insurance, which helps to cover the contractor in the event of any legal cases being brought against them in respect to the services that they provide to their clients.

Oriel’s Goddard continues:

“By registering with an umbrella company, a contractor becomes an employee of the umbrella company, while retaining the desired flexibility to find and choose their own work, clients, rates, terms and conditions.”

“Umbrella companies help contractors to save time on administration, time which could be better spent by most contractors. Umbrella companies are a far simpler way for contractors to trade whilst reducing their tax burden to the lowest possible level.”

An umbrella company is designed for today’s modern contractor who has better things to do after a hard day’s work than sit in front of a computer and struggle with spreadsheets, forms and figures.

CIS is a bespoke set of HMRC rules that govern what tax is owed when contractors pay subcontractors for construction work.

• Any company that does business in the construction industry, as a contractor paying subcontractors, should be registered for the CIS scheme.

• Any subcontractor, working in construction and paid by a contractor, should be registered as CIS for tax purposes.

Contractors

What is a ‘contractor’? If, like many in the construction industry, your company contracts construction work out to subcontractors then you are a ‘contractor’. A company or business that is a ‘contractor’ needs to register with HMRC as a ‘contractor’.

A contractor should do two things:

• Register with HMRC, by phone or online.

• Verify your subcontractors, to find out how to pay them.

Subcontractors

What is a ‘subcontractor’? A ‘subcontractor’ is a person, normally self-employed, who works in the following way:

• Is in the construction industry

• Has a contract with a contractor

• Is paid by the contractor for the work done

If you tick these boxes it is highly probable that your work, and tax, will be covered by CIS.

Subcontractors should register with HMRC as self employed and operating under the Construction Industry Scheme. The information you need to give HMRC will depend whether you are a sole trader, partnership or company. HMRC will then give you a Unique Taxpayer Reference (UTR).

Subcontractors will need to tell the contractor that they are CIS registered. This enables the contractor to verify you with HMRC and know what tax to take off your gross pay; this will be one of three amounts:

• 0%, Gross receipt

• 20% Standard Deduction

• 30% Higher Rate Deduction

The deductions made during the tax year are effectively payments of tax on account and in line with all self employed workers CIS subcontractors must complete a Self Assessment at the end of each tax year. Many sub contractors have their own accountants to help with this but companies like Oriel Contractors can also offer advice on completing the self assessment. In most standard rated cases the completion of the self assessment will lead to a tax rebate so it is important to complete the return soon after the fiscal year end.

Jim Goddard, Divisional Manager of Oriel Contractors, says: “We deal with hundreds of subcontractors every day. Our job is to do all the administration and paperwork for them – we take all the hassle and burden away from subcontractors so they can get on with their job knowing all the red tape is being dealt with. All the subcontractor needs to do is give our friendly and expert team a call and we’ll do the rest.”

Companies like Oriel Contractors are great for the subcontractor who hates paperwork and don’t like endless administration. If you’re a subcontractor it’s probably worth spending a few minutes looking into this option. The downside is you’ll have a wasted call; the upside is you can get on with your job without having to worry about HMRC, paperwork or tax.

What is the biggest challenge facing contractors and their suppliers at the moment?

The market is still in recession which has led to severe pressure on profit margins, a lot of churn in the market with short term contracts and low pay rates. Contractors are having to travel further to find work and some are only finding assignments for one or two days a week. There is little sign of the government’s promised infrastructure projects helping to generate work in the construction industry.

Have you had to alter your services since the on set of the recession?

We have had to become more flexible to help our clients and the extra churn is meaning that we are handling a far greater number of new starters each week. We are dealing with far more agencies than the same time last year but most of our agencies are on lower overall contractor numbers. The market has become more competitive with agencies constantly looking for the best deals for their contractors. Oriel Contractors has positioned itself to offer rates that compete with all those offered by the major contractor payroll suppliers.

What advice do you give to contractors/agencies when contracts are ended early or day-rates are altered mid-contract?

We have not had experience of this. Some end clients are looking to our agencies to reduce their charge rates and if this does happen and it affects the contractor’s pay rate this is always communicated in advance so the contractor has an opportunity to accept or decline the work.

Is the company worried about debt transfer after the legislation came into force at the start of the year?

For ourselves we are not concerned as we have consulted with a big 4 accountancy practice to ensure that all its payroll products are fully compliant with the MSC legislation; as a result we do not believe the debt transfer legislation will affect us or any of our clients. However, for the industry as a whole we are concerned that there will be an impact where non compliant schemes exist.

Please note we also have a specific worry over some umbrella schemes with regard to expense dispensations and minimum wage rates – see below

What could the government do to support the industry at this critical point?

Probably the main actions are to commence and/or accelerate the promised infrastructure projects and also to avoid yet more legislation for the contractor market.

However, there are areas of concern that we have regarding certain umbrella companies. The main issue we see is that some suppliers are actively promoting expense dispensations, without requiring receipts, as a way of contractors maximising their tax free income. This is a wrong practice and if the expense claims are found to be invalid the contractor could face a large bill for back taxes and NI, as could, potentially, the employment agency concerned. Our approach is that we will only allow business expenses that are supported by receipts. This approach is fully compliant but many contractors will be seduced by the higher expense dispensations that other suppliers promote without fully understanding the risks that they are taking. It would help if HM Revenues and Customs were to remove dispensations that are misused in this way.

Are there any other issues facing the industry that you would like to highlight?

The recession has led to an erosion of margins across the industry and this is most apparent for the lower paid workers. Some agencies are using unscrupulous umbrella companies to pay contract workers below the minimum wage. The increase in the holiday allowances in April 2009 has added to the cost of the agencies supplying labour at a time when clients are demanding a cut in labour rates. These factors can lead to agencies supplying contractors below the minimum wage. Some umbrella companies pay a gross wage for the week or pay on a day rate so that the actual hourly rate cannot be easily derived.